Thursday 10 September 2009

Bang Go The Bonuses??

Today's Financial Times reported that JPMorgan have produced a piece of research which states that investment banks will become less profitable due to the impact of new regulation. About time...

... that the regulators got a grip and that the investment banks (some of whom were responsible for the present crisis) also realised that stellar profits come at the expense of something else. If the extra costs of being regulated go direct to the regulators to pay for increased oversight, this must be a good thing. Sadly, it is not the case. By the look of it, the reason for reduced profitability is that banks will have to raise more capital as a buffer against further crises, thereby reducing their return on equity. In other words, regulators can remain less competent, bankers "may" be able to take the same risks, and we can bet that someone will find a way around the new capital rules.

Surely the simple answer is to reduce expectations all round? People borrow less, banks lend less, bankers rememebr their "fiduciary duty", shareholders and analysts lower their expectations in the hope that reduced profitability results in steadier economies, dividend streams and share price increases, and everyone is happy! This will require a massive "paradigm shift", but still lets central banks, governments and regulators off the proverbial hook.

We will still need competent regulators, and governments who are willing to do the "right" thing as opposed to the "politically expedient" thing. Central banks will have to look more closely at the results of credit being too cheap - a major cause of the current scenario thanks to the Fed flooding the market with cheap liquidity in the wake of 9/11.

Even more interesting was the report that various bankers are suing for bonuses that they claim they are owed... One wonders how much they can spend (or how much they have committed to spend). Surely this is the attitude that caused the trouble in the first place?

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